There is a 90% chance that the investment will fail and most likely, zero return.
Would you sign off?
Amazingly, the answer to this question is almost always, "Yes."
Blinded by the spectacular pay off when it goes right, CFOs not only in the UK but all around the world are lured into a false sense of optimism and caught up in the fever of the moment. They are not alone. The CEO and the Board then also give their blessing.
The one million pound price tag is the estimated cost for the development and implementation of the... new corporate strategy.
Strategies are created to win market share, improve operations and service, beat the competition, launch new products and leverage technology to name just a few. But no matter the strategy and its objective more often than not it fails to deliver the results.
Just think for a moment what this means: you have little or nothing to show for the time and investments you have spent creating the strategy, attending meetings, participating in conference calls, working the numbers, engaging external advice and preparing the organization.
Research conducted in different parts of the world has revealed this alarming statistic.
• In their outstanding book The Balanced Scorecard, David Norton and Robert Kaplan noted that 90 percent of organizations fail to execute their strategies successfully.
• A. Blanton Godfrey, Chairman and CEO of the Juran Institute, a Connecticut-based consultancy, claims that as few as 10 percent of technology initiatives deliver their anticipated benefits.
• Douglas K. Smith, author of the book Taking Charge of Change, 10 Principles for Managing People and Performance states that, "Even with significant financial and intellectual resources devoted to change, up to 80 percent on fundamental change efforts fail and companies revert to business as usual".
• A long term study by Newcastle University, UK (1973-1989), showed that business success is governed more by how well strategies are implemented than how good the strategy is to begin with.
• "80% of IT projects fail," FT July 06
• Bridges Business Consultancy Int. (the company I work for) surveyed businesses across Southeast Asia over a five year period and found that 90 percent of strategy implementations failed to deliver desired results.
The challenge for CFOs today is to balance the one million pound investment. Currently almost all the costs are spent upfront on the strategy creation. The main cost is often the hiring of external consultants. This can be as much as 150, 000 pounds a month, (and some companies take two years to develop their strategy!) The importance, however, of identifying the right strategy is critical. You are betting on the future of the company. You are responsible for the people working for you and after all, the reason senior leaders are paid so much is that their primary job is to be able to have the helicopter view and realize when the new strategy is required, before it is required!
The concept of balancing a portfolio is investment skill 101. Why therefore when it comes to strategy do CFOs throw many of their financial skills and knowledge out the window?
Last year consulting services (management, scientific and technical) generated about $139 billion in revenues in the U.S., according to a survey by the U.S. Bureau of the Census. (Accounting services generated an additional $99 billion.). In other words approximately $125 billions dollars was lost in failed strategy implementations.
Performance of the world's largest 100 industrial companies in 1912 over the period 1912-95 (Source: Hannah, 1999) also reveals there is a problem with our current thinking:
Bankrupt 29
Disappeared 48
Survived 52
Remained in top 100 in 199 19
Only 28 were larger in 1995 than they were in 1912. A small number such as P&G and BP were very much larger. They are the one in ten who got it right.
What We Have Learned From Failures and Successes
• CFOs must balance their investment in strategy between strategy creation and strategy implementation. Today most of the investment is upfront and results in a zero return most of the time. Those who get it right invest cautiously rather than betting all their chips on one turn of the wheel.
• The Cost of Implementation is minor compared to the Cost of Creating the Strategy. The reason for this is that when the implementation is successful it very quickly pays back the initial costs. A bank in the Middle East spent two years engaging a strategy house and to develop the strategy to focus on high net worth clientele. Within six months they had paid back all their Cost of Creating the Strategy. This, however, is the exception, not the norm. As the returns are high, well, so is the risk. When considering the strategy costs use the same modeling you would use for the market.
• Don't underestimate the implementation challenge. A large reason for the poor Strategy ROI is that leaders underestimate what is ahead of them after they craft the strategy. They feel their job is mostly done and they can delegate the implementation. Implementation typically involves changing the genetic code of the company, working in eight dimensions simultaneously (see side bar), and taking action that needs to be supported both financially and emotionally. A good strategy is one that is both crafted and implemented well.
• For the board to sign off on the strategy you will have created the "Biz Case" on why it is the right strategy. This will characteristically be financially focused as after all you are there to make a profit. When you present the "Biz Case" to the staff members you need to present the same strategy but from a rational perspective. Frontline staff are rarely interested in shareholder value, balance sheets and profit and loss statements. Building the emotional story of why the strategy is being adopted is a much more powerful communicator. Therefore you need to present both the financial and the rational on why the strategy is being adopted.
What we need to do differently going forward is apply the same risk management skill used in investing to strategy creation and implementation.
When writing the book Bricks to Bridges - Make Your Strategy Come Alive I conducted a five year survey across South East Asia, with 150 leaders. The principal aim was to identify how many companies successfully implemented strategy and to find out what they did differently. The results revealed that they focus on multiple dimensions simultaneously. Below are the dimensions and key questions:
People
Do you have the right caliber of people?
Do they have the competencies to execute the new strategy?
Are they motivated to do so?
Biz Case
Do people know why the strategy is center stage?
Do they know what to do differently on the Monday morning?
Do they have the right tools and techniques to implement the strategy?
Communicate
Do all your staff know what the new strategy is and why it has been adopted?
Is the strategy communicated in a way that it comes alive?
Measure
Do you have the right measures for the new strategy?
Are the measures being leveraged to guide the implementation?
Culture
Has the fundamental way you are working changed so as to encourage the adoption of the new culture?
Are you using the language of the new strategy?
Process
Do your processes support the new strategy?
Are you equipped to redesign processes so that they are more supportive and effective?
Reinforce
When staff members step in to the unknown and demonstrate the new behaviors, are they recognized and rewarded? Does the reinforcement encourage them to continue to demonstrate the desired new behaviors?
Review
Do you know if the actions being taken are producing the right results? Do you know what has been learned from the implementation in the last 90 days?
Robin_Speculand
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